Question

Colombia is the world’s biggest producer of roses. The global demand for roses increases and at the
same time, the central bank in Colombia increases the interest rate. In the foreign exchange market
for Colombian pesos, what happens to?
a. The demand for pesos?
b. The supply of pesos?
c. The exchange rate of the peso against the U.S. dollar?

Answer 1

a) The demand for roses will increase , leading to an increase in the demand for pesos making the demand curve for pesos to shift to the right.

b) The Central Bank will reduce the supply of pesos and purchase more leading to a shift in the supply of pesos to the right

c) The exchange rate of the pesos will be lower because there is a high demand for foreign currency in the foreign exchange market.